Financial Accounting

IFRS 4th Edition

Weygandt ● Kimmel ● Kieso

Chapter 8
Accounting for Receivables
Chapter Outline:
Learning Objectives
LO 1 Explain how companies recognize accounts
receivable.
LO 2 Describe how companies value accounts receivable
and record their disposition.
LO 3 Explain how companies recognize, value, and
dispose of notes receivable.
LO 4 Describe the statement presentation and analysis of
receivables.
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Learning Objective 1
Explain How Companies Recognize
Accounts Receivable

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Recognition of Accounts Receivables
• The term receivables refers to amounts due from
individuals and companies
• Receivables are claims that are expected to be
collected in cash
• Management of receivables is a very important
activity for any company that sells goods or services
on credit
• Receivables are important because they represent
one of a company’s most liquid assets

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Types of Receivables (1 of 2)
Amounts due from individuals and companies that are expected to
be collected in cash.

Amounts customers Written promise Nontrade receivables

owe on account that (formal instrument) such as loans to
result from the sale for amount to be officers, advances to
of goods and received. Normally employees, and
services. requires the income taxes
collection of refundable.
interest.
Accounts Notes Other
Receivable Receivable Receivables

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Recognizing Accounts Receivable (1 of 5)
• Service organization records a receivable when it
performs service on account
• Merchandiser records accounts receivable at point of
sale of merchandise on account
• Seller may offer a discount to encourage early
payment
• Buyer might return goods found to be unacceptable
 Sales returns reduce receivables

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Recognizing Accounts Receivable (2 of 5)
Illustration: Assume that Zhang Ltd. on July 1, 2020, sells
merchandise on account to Li Stores for ¥1,000, terms 2/10,
n/30 (amounts in thousands). On July 5, Li returns
merchandise with a sales price of ¥100 to Zhang. Prepare the
journal entries to record these transactions. On July 11, Zhang
receives payment from Li for the balance due. Prepare the
journal entry to record this transaction.

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Recognizing Accounts Receivable (4 of 5)
Some retailers issue their own credit cards. When you use a
retailer’s credit card (IKEA, for example), the retailer charges
interest on the balance due if not paid within a specified
period (usually 25–30 days).
Illustration: Assume you use your IKEA credit card to purchase
clothing with a sales price of €300 on June 1, 2020. The entry
IKEA recorded as follows

Jun. 1 Accounts Receivable 300

Sales Revenue 300

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Recognizing Accounts Receivable (5 of 5)
Illustration: Assuming that you owe €300 at the end of the
month and IKEA charges 1.5% per month on the balance due,
the adjusting entry that IKEA makes to record interest
revenue of €4.50 (€300 × 1.5%) on June 30 is as follows.

June 30 Accounts Receivable 4.50

Interest Revenue 4.50

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Learning Objective 2
Describe How Companies Value
Accounts Receivable and Record Their
Disposition

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Valuation of Accounts Receivable
Valuing Accounts Receivable
• Current asset
• Valuation (net realizable value)
Uncollectible Accounts Receivable
• Sales on account raise possibility of accounts not
being collected
• Seller records losses that result from extending
credit as Bad Debt Expense

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Accounting for Uncollectible Accounts
(1) Direct Write-Off Method
(2) Allowance Method

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Accounting for Uncollectible Accounts
Direct Write-Off Method
• No matching of expenses with revenues
• Receivable not stated at net realizable value
• Not acceptable for financial reporting purposes
Illustration: Assume that Warden Co. writes off as
uncollectible M. E. Doran’s $200 balance on December 12.
Unless bad debt losses are insignificant, the direct write-off
method is not acceptable for financial reporting purposes.

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Accounting for Uncollectible Accounts
Allowance Method
• Better matching of expenses with revenues
• Receivable stated at cash (net) realizable value
• Required for financial reporting purposes

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Allowance Method for Uncollectible
Accounts
1. Companies estimate uncollectible accounts
receivable.
2. Debit Bad Debt Expense and credit Allowance for
Doubtful Accounts (a contra-asset account).
3. Companies debit Allowance for Doubtful Accounts
and credit Accounts Receivable at the time the
specific account is written off as uncollectible.

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Allowance Method for Uncollectibles
(1 of 5)

Recording Estimated Uncollectibles

Illustration: Hampson Furniture has credit sales of €1,200,000
in 2020, of which €200,000 remains uncollected at December
31. The credit manager estimates that €12,000 of these sales
will be uncollectible.
Dec. 31 Bad Debt Expense 12,000
Allowance for Doubtful Accounts 12,000

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Allowance Method for Uncollectibles
(2 of 5)

Hampson Furniture
Statement of Financial Position (partial)

Current Assets Blank Blank

Supplies Blank € 25,000

Inventory Blank 310,000
Accounts receivable €200,000 188,000
Allowance for doubtful accounts 12,000 Blank
Cash Blank 14,800
Total current assets Blank €537,800

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Allowance Method for Uncollectibles
(3 of 5)

Illustration: The financial vice president of Hampson Furniture

authorizes a write-off of the €500 balance owed by R. A. Ware
on March 1, 2021. The entry to record the write-off is as
follows.
Mar. 1 Allowance for Doubtful Accounts 500
Accounts Receivable 500

Accounts Receivable Allowance for Doubtful Accounts

Jan. 1 Bal. 200,000 Mar. 1 500 Mar. 1 500 Jan. 1 Bal. 12,000
Mar. 1 Bal. 199,500 Mar. 1 Bal. 11,500

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Allowance Method for Uncollectibles
(4 of 5)

Recovery of an Uncollectible Account

Illustration: On July 1, R. A. Ware pays the €500 amount that
Hampson had written off on March 1. Hampson makes the
following entries.
July 1 Accounts Receivable 500
Allowance for Doubtful Accounts 500
July 1 Cash 500
Accounts Receivable 500

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Do It!
BE8.3 During its first year of operations, Energy Solutions had credit sales of
€3,000,000; €600,000 remained uncollected at year-end. The credit manager
estimates that €31,000 of these receivables will become uncollectible. Prepare
the journal entry to record the estimated uncollectible.
Prepare the current assets section of the statement of financial position for
Energy Solutions. Assume that in addition to the receivables it has cash of
€90,000, inventory of €130,000, and pre- paid insurance of €7,500.
BE8.4 At the end of 2020, Chin Appliances has accounts receivable of ¥700,000
and an allowance for doubtful accounts of ¥54,000 (amounts in thousands). On
January 24, 2021, the company learns that its receivable from Megan Gray is not
collectible, and management authorizes a write-off of ¥6,200. Prepare the journal
entry to record the write-off. What is the cash realizable value of the accounts
receivable before the write-off and after the write-off?
BE8.5 Assume the same information as BE8.4. On March 4, 2021, Chin Appliances
receives payment of ¥6,200 in full from Megan Gray. Prepare the journal entries
to record this transaction.
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Estimating the Allowance (1 of 4)
Frequently, companies estimate the allowance as a
percentage of the outstanding receivables.
Percentage-of-Receivables Basis
• Management establishes a percentage relationship
between amount of receivables and expected losses from
uncollectible accounts
• The company prepares an aging schedule, in which it
classifies customer balances by the length of time they
have been unpaid. Because of its emphasis on time, the
analysis is often called aging the accounts receivable.

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Estimating the Allowance (2 of 4)
Accounts Receivable Aging Schedule
Number of Days Past Due
Not yet
Customer Total Due 16-30 31-60 61-90 Over 90
T.E. Adert ¥ 600 ¥ 300 ¥ 200 ¥ 100
R.C. Bortz 300 ¥ 300
B.A. Carl 450 200 ¥ 250
O.L. Diker 700 550 200
T.O. Ebbet 600 300 300
Others 36,950 26,200 5,200 2,450 1,600 1,500
¥39,600 ¥27,000 ¥5,700 ¥3,000 ¥2,000 ¥1,900
Estimated %
uncollectible 2% 4% 10% 20% 40%
Total estimated
uncollectible ¥2,228 ¥540 ¥228 ¥300 ¥400 ¥760
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Estimating the Allowance (3 of 4)
Amount of bad debt expense that should be recorded is difference between
required balance and existing balance in allowance account
Illustration: The unadjusted trial balance shows Allowance for Doubtful
Accounts with a credit balance of ¥528. Prepare the adjusting entry assuming
¥2,228 is the estimate of uncollectible receivables from the aging schedule.

Dec. 31 Bad Debt Expense 1,700

Allowance for Doubtful Accounts 1,700

Bad Debt Expense Allowance for Doubtful Accounts

Dec. 31 Adj. 1,700 Dec.31 Bal. 528
Dec. 31 Adj. 1,700
Dec. 31 Bal. 2,228

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Estimating the Allowance (4 of 4)
Illustration: Assume the unadjusted trial balance shows
Allowance for Doubtful Accounts with a debit balance of
¥500. Prepare the adjusting entry assuming ¥2,228 is the
estimate of uncollectible receivables.
Dec. 31 Bad Debt Expense 2,728
Allowance for Doubtful Accounts 2,728

Bad Debt Expense Allowance for Doubtful Accounts

Dec. 31 Adj. 2,728 Dec. 31 Bal. 500
Dec. 31 Adj. 2,728
Dec. 31 Bal. 2,228

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Do it!
BE8.6 (LO 2) Kingston Publishers uses the percentage-of-
receivables basis to record bad debt expense. It estimates
that 1% of accounts receivable will become uncollectible.
Accounts receivable are £420,000 at the end of the year,
and the allowance for doubtful accounts has a credit
balance of £1,500.
Prepare the adjusting journal entry to record bad debt
expense for the year.
If the allowance for doubtful accounts had a debit balance
of £800 instead of a credit balance of £1,500, determine
the amount to be reported for bad debt expense.
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 Disposing of Accounts Receivables (1 of 2)
Companies sell receivables for two major reasons.
1. Receivables may be the only reasonable source of
cash.
2. Billing and collection are often time-consuming and
costly.

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Disposing of Accounts Receivables (2 of 3)
Sale of Receivables to a Factor
• Finance company or bank
• Buys receivables from businesses and then collects
payments directly from customers
• Typically charges a commission to company that is
selling receivables
• Fee ranges from 1% to 3% of receivables purchased

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Sale of Receivables to a Factor
Illustration: Assume that Keelung Jewelry factors NT$600,000
of receivables to Federal Factors (amounts in thousands).
Federal Factors assesses a service charge of 2% of the
amount of receivables sold. The journal entry to record the
sale by Keelung Jewelry is as follows.

Cash 588,000
Service Charge Expense 12,000
Accounts Receivable 600,000
(NT$600,000 × 2% = NT$12,000)

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Disposing of Accounts Receivables (3 of 3)
Credit Card Sales
• Retailer pays card issuer a fee of 2 to 4% of invoice
price
• Advantages to retailer:
 Issuer does credit investigation of customer
 Issuer maintains customer accounts
 Issuer undertakes collection and absorbs losses
 Receives cash more quickly

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National Credit Card Sales
Illustration: Ling Lee purchases NT$6,000 of paper products
for her restaurant from Wu Supplies using her Visa First Bank
Card. First Bank charges a service fee of 3%. The entry to
record this transaction by Wu Supplies on March 22, 2020, is
as follows.

Cash 5,820
Service Charge Expense 180
Sales Revenue 6,000
(NT$6,000 × 3% = NT$180)

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Do it!
BE8.7 (LO 2) Presented below are two independent
transactions.
a. Fiesta Restaurant accepted a Visa card in payment of a
€175 lunch bill. The bank charges a 4% fee. What entry
should Fiesta make?
b. St. Pierre AG sold its accounts receivable of €60,000.
What entry should St. Pierre make, given a service charge
of 3% on the amount of receivables sold?

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Learning Objective 3
Explain How Companies Recognize,
Value, and Dispose of Notes Receivable

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Notes Receivable (1 of 2)
Companies may grant credit in exchange for a promissory
note. A promissory note is a written promise to pay a
specified amount of money on demand or at a definite
time.
Promissory notes may be used
1. when individuals and companies lend or borrow
money,
2. when amount of transaction and credit period
exceed normal limits, or
3. in settlement of accounts receivable.
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Notes Receivable (2 of 2)
To the payee, the promissory note is a note receivable.
To the maker, the promissory note is a note payable.

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Determining the Maturity Date
Maturity date of a promissory note may be stated in one
of three ways:
1. On demand.
2. On a stated date.
3. At the end of a stated period of time.
Note terms are expressed in:
• Months
• Days

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Computing Interest
Face Value of Note × Annual Interest Rate × Time in
Terms of One Year = Interest
When counting days, omit date note is issued, but
include due date
Terms of Note Interest Computation
Face x Rate x Time = Interest
₺ 730, 12%, 120 days ₺ 730 x 12% x 120/360 = ₺ 29.20
₺1,000, 9%, 6 months ₺1,000 x 9% x 6/12 = ₺ 45.00
₺2,000, 6%, 1 year ₺2,000 x 6% x 1/1 = ₺120.00

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Do it!

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Recognizing Notes Receivable
Illustration: Calhoun plc wrote a £1,000, two-month, 12%
promissory note dated May 1, to settle an open account.
Prepare an entry Wilma Ltd. would make for the receipt of the
note.

May 1 Notes Receivable 1,000

Accounts Receivable 1,000

Do it! BE8.10 (LO 3) On January 10, 2020, Wilfer Ltd. sold merchandise on account to
Robertsen Co. for HK$84,600, n/30. On February 9, Robertsen Co. gave Wilfer Ltd. a
10% promissory note in settlement of this account. Prepare the journal entry to record
the sale and the settlement of the account receivable. (Omit cost of goods sold
entries.)

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Valuing Notes Receivable
• Report short-term notes receivable at their cash (net)
realizable value
• Estimation of cash realizable value and recording bad
debt expense and related allowance are similar to
accounts receivable

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Disposing of Notes Receivable (1 of 2)
1. Notes may be held to their maturity date
2. Maker may default and payee must make an
adjustment to the account
3. Holder speeds up conversion to cash by selling the
note receivable

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Disposing of Notes Receivable (2 of 2)
Honor of Notes Receivable
• Maker pays it in full at its maturity date

Dishonor of Notes Receivable

• Not paid in full at maturity
• No longer negotiable

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Honor of Notes Receivable
Illustration: Wolder Co. lends Higley Co. €10,000 on June 1,
accepting a five-month, 9% interest note. To obtain payment,
Wolder (the payee) must present the note either to Higley Co.
(the maker) or to the maker’s agent, such as a bank. If Wolder
presents the note to Higley Co. on November 1, the maturity
date, Wolder’s entry to record the collection is as follows.

Nov. 1 Cash 10,375

Notes Receivable 10,000
Interest Revenue (€10,000 × 9% x 5/12) 375

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Accrual of Interest Receivable (1 of 2)
Illustration: Suppose instead that Wolder Co. prepares
financial statements as of September 30. The adjusting entry
by Wolder is for four months ending Sept. 30.

Sept. 30 Interest Receivable (€10,000 × 9% x 4/12) 300

Interest Revenue 300

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Accrual of Interest Receivable (2 of 2)
Illustration: Prepare the entry Wolder’s would make to record
the honoring of the Higley note on November 1.

Nov. 1 Cash 10,375

Notes Receivable 10,000
Interest Receivable 300
Interest Revenue (€10,000 × 9% x 1/12) 75

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Dishonor of Notes Receivable (1 of 2)
Illustration: Assume that Higley Co. on November 1 indicates
that it cannot pay at the present time. If it does expect
eventual collection, Wolder Co. would make the following
entry at the time the note is dishonored (assuming no previous
accrual of interest).

Nov. 1 Accounts Receivable 10,375

Notes Receivable 10,000
Interest Revenue 375

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Dishonor of Notes Receivable (2 of 2)
Illustration: If instead on November 1 there is no hope of
collection, the note holder would write off the face value of the
note by making the following entry at the time the note is
dishonored (assuming no previous accrual of interest).

Nov. 1 Allowance for Doubtful Accounts 10,000

Notes Receivable 10,000

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Learning Objective 4
Describe the Statement Presentation
and Analysis of Receivables

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Presentation and Analysis
Presentation
Statement of Financial Position
Identify on statement or in the notes each major
type of receivable
Report short-term receivables as current assets
Report both gross amount of receivables and
allowance for doubtful account

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Presentation and Analysis
Presentation
Income Statement
Report bad debt expense and service charge
expense in operating expenses section
Report interest revenue under “Other income and
expense” in non-operating section

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Analysis
Illustration: Cisco Lenovo Group (CHN) (which reported in U.S.
dollars) had net sales of $38,707 million for the year. It had a
beginning accounts receivable (net) balance of $2,885 million
and an ending accounts receivable (net) balance of $3,171
million. Assuming that Lenovo’s sales were all on credit, its
accounts receivable turnover is computed as follows.

Net Credit ÷ Average Net = Accounts Receivable

Sales Accounts Receivable Turnover
$2,885 + $3,171
$38,707 ÷ = 12.8 times
2

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Analysis
Illustration: A variant of the accounts receivable turnover ratio
is average collection period in terms of days.

Net Credit ÷ Average Net = Accounts Receivable

Sales Accounts Receivable Turnover
$2,885 + $3,171
$38,707 ÷ = 12.8 times
2

Days in ÷ Accounts Receivable = Average Collection

Year Turnover Period in Days
365 days ÷ 12.8 times = 28.5 days

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DO IT! 4: Analysis of Receivables
Illustration: In 2020, Nadal Racquets has net credit sales of €923,795 for
the year. It had a beginning accounts receivable (net) balance of €38,275
and an ending accounts receivable (net) balance of €35,988. Compute
ILLUSTRATION 9.21

Nadal’s (a) accounts receivable turnover and (b) average collection period
in days.
Net Credit ÷ Average Net Accounts = Accounts Receivable
Sales Receivable Turnover
€38,275 + €35,988
€923,795 ÷ = 24.9 times
2

Accounts Receivable Average Collection

Days in Year ÷ Turnover = Period in Days
365 days ÷ 24.9 times = 14.7 days

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Homework
P8.3, P8.6, P8.7

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Appendix: Learning Objective 5
Compare the Accounting for
Receivables Under I F R S and U.S.
GAAP

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A Look at U.S. G A A P (1 of 3)
Key Points
Similarities
• The recording of receivables, recognition of sales returns and
allowances and sales discounts, and the allowance method to
record bad debts are the same between G A A P and I F R S.
• Both I F R S and G A A P often use the term impairment to
indicate that a receivable or a percentage of receivables may
not be collected.
• The F A S B and I A S B have worked to implement fair value
measurement (the amount they currently could be sold for)
for financial instruments, such as receivables. Both Boards
have faced bitter opposition from various factions.

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A Look at U.S. G A A P (2 of 3)
Key Points
Differences
• Although I F R S implies that receivables with different
characteristics should be reported separately, there is no
standard that mandates this segregation.
• I F R S and G A A P differ in the criteria used to determine
how to record a factoring transaction. I F R S uses a
combination approach focused on risks and rewards and loss
of control. G A A P uses loss of control as the primary
criterion. In addition, I F R S permits partial derecognition of
receivables; G A A P does not.

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A Look at U.S. G A A P (3 of 3)
Looking to the Future
Both the I A S B and the F A S B have indicated that they believe
that financial statements would be more transparent and
understandable if companies recorded and reported all financial
instruments at fair value.

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Copyright
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